ATM :: Still paying interest on home loan at old rates? Cut EMI by switching to MCLR-linked rate now

Just like bank depositors, those borrowing from banks also need to be alert in order to protect themselves against unnecessary charges. Given below are the most common areas where banks tend to overcharge customers.

If you compare the interest costs of your friends and relatives on bank loans—housing, auto, personal loan, etc.—you will realise that they vary drastically. And these costs not only vary across banks, but across customers of the same bank—and not because of varying customer credit scores. Some banks have been offering loans at cheaper rates to new customers, while charging old customers a higher rate. “Banks continue to follow the discriminatory practice of offering differential rates for existing and new customers and this should stop,” says Ramganesh Iyer, Co-founder, Fisdom.

As the banking regulator, the Reserve Bank of India (RBI) should stop this discriminatory practice, which it is partly responsible for creating. The RBI introduced the MCLR (marginal cost based lending rate) method, effective April 2016, to enable a faster transmission of rate cuts to bank customers, replacing the base rate method that was being used by banks to set their lending rates—earlier the base rate had replaced the less transparent prime lending rate (PLR). Now, borrowers who took loans 4-5 years back, and did not ask their bank to switch to the newer regime, are still linked to the PLR. Those who borrowed when the base rate became the benchmark are stuck with the base rate. Now, while banks are giving new loans at cheaper rates, based on MCLR, old customers are still paying higher rates.

“Since banks offer different rates, it is better to visit some common aggregator and understand the lowest rates available in the market. This will help you bargain better with your bank,” says Dipak Samanta, CEO, iServeFinancial.

To reduce your interest outgo, you need to shift your loan from base rate or PLR to MCLR. Shifting to MCLR now is a good move, say experts. “Though RBI’s stand is neutral now, rates may not go up from current levels. In fact, they may come down later—after an year,” says Balwant Jain, investment expert. Bear in mind though, in an upward moving interest rate regime, MCLR will move up faster than base rates, just like it falls faster in a reducing interest rate regime.

Loan reset charges
There are two types of loans: Fixed and floating rate. Floating rate loans are supposed to mirror the rise and fall in interest rates set by the RBI. But this rarely happens. While banks increase rates immediately, they are very slow in cutting them. The introduction of new benchmarks has also turned out to banks’ advantage. They charge customers for shifting from one benchmark to another— from PLR regime to base rate regime to MCLR regime now. The charges are levied to meet the expenses involved in drafting and registering new agreements—stamp duty, registration charges, etc. Though these expenses vary across states, ordinarily they won’t be more than 0.2% of the outstanding amount. However, some banks try to profit from this also by charging around 0.5%.

Should you go for a reset even if it involves a small charge? Yes. The amount you save will be significantly higher over the years. To illustrate, consider the case of a home loan borrower with Rs 50 lakh outstanding loan amount and a 15-year tenure. A 1% fall in interest— from 9.5% to 8.5%—will bring his EMI from down from Rs 52,200 to Rs 49,250, a reduction of Rs 2,950 per month. A total saving of Rs 5.31 lakh—significantly higher than the reset fee of Rs 25,000 even at the maximum rate of 0.5%. You may be able to get this reset cost down by negotiating with your bank. A threat of shifting to another bank often works. “Another way is to approach the branch manager. Based on the value of your relationship, they can reduce or even waive charges,” says Samanta. The ‘value of relationship’ here is crucial. If you have multiple relationships with the bank—savings bank account, credit card, other loans, investment, etc.—you have a valuable relationship and will receive a favourable treatment.